Speculation is certainly not for everyone, but trading is definitely not a snobbish occupation of an exclusive club of Ivy League graduates. There are many things to be said about trading. However, two points are paramount in becoming a successful trader: a rock-solid discipline and a timely acceptance of the losses.
In a nutshell, investors could have either a bullish or a bearish sentiment. That practically translates in the expectations that the markets will rise or fall within a pre-defined time-horizon. Under a quick classification, any financial instrument could be either a spot product or a derivative product. For instance, when you buy 100 shares of Apple [AAPL] you create a long position in that stock. For every dollar that AAPL share goes up in value you make a $100 in profit. Your profit & loss (P&L) account goes up or down linearly with the underlying product. However, when you trade futures or options products, the relationship does not work anymore. An option is a derivative, as it derives its value from an underlying asset. As the price of the underlying asset, such as a stock or commodity, moves in the marketplace, the price of the option changes in harmony. Continue reading ‘Options Trading 101′
Monthly Archive for August, 2009
The most important question you will hear nowadays is “How quickly will we recover?” The answer to this question can be found by analyzing the shape of the current recession. Economists tend to refer to the following four shapes: V-shaped, U-shaped, W-shaped and L-shaped recessions.
V-shaped recessions are recessions that begin with a steep fall but then quickly find a bottom, turn back around and move immediately higher. These are the best-case scenarios, and they happened in 1990-1991 and 2001 recessions. U-shaped recessions are recessions that begin with a slightly slower decline but then remain at the bottom for an extended period of time before turning around and moving higher again. The recession from 1971 through 1978 when both unemployment and inflation were high for years – is considered a U-shaped recession. Continue reading ‘The Square Root Recession’
Friday we witnessed another big gain for the S&P 500 index. Markets have risen a long way over the past five months. Back in March 2009, when the markets reached a 12-year low (i.e., on March 6th S&P traded at 666), there were plenty of analysts that had predicted a total collapse of the global financial markets. The bearish sentiment triggered a panic-driven sell-off with investors expecting the worst scenario with S&P index down to 500-point level. In their defense, they had some valid points: 1) a further 15% decline in home prices, 2) a worldwide-spread recession, 3) significant future earnings declines and 4) a considerably trimmed down debt market.
Continue reading ‘From Panic to Euphoria’
Since the global credit crisis began, banks and financial institutions have reported more than $1.5 trillion in credit losses and writedowns worldwide. Even though it seems like we passed the hardest economic period in decades, I strongly believe we are not out of the woods yet. To understand when we could reach that spot, I would pinpoint some key metrics that we should look at when judging the stage of the global economic revival. I hope that many of my readers would agree that the epicenter of the global financial meltdown will coincide with the place where the economic rebound is to occur first. By all means, that place is the US economy. Continue reading ‘Are We Out of the Woods?’
Three Strikes – A Strikeout
In baseball, the player that is supposed to bat is declared out when he misses three strikes. Switching to economics now, let’s have a walk together on the economic forecasting road. According to Professor Thomas Kida from the University of Massachusetts “… economics typically does not use the scientific method, where hypotheses are tested by observing what goes on in the economy. Instead, economists often develop elaborate theories that may be logically consistent, but are often based upon unrealistic concepts.” To me, there is nothing wrong with being off-the-chart once or twice. However, persisting in statistical outliers should strike you out from the economists’ table. As we all remember from the Latin lessons “errare humanum est perseverare diabolicum”. Then, let the case reveal itself.
Continue reading ‘Three Strikes – A Strikeout’